IFC upbeat on Chile's potential, urges green hydrogen embrace

Bnamericas Published: Tuesday, December 06, 2022
IFC upbeat on Chile's potential, urges green hydrogen embrace

The World Bank Group’s private sector arm IFC is supporting Chile’s decarbonization push on two main fronts and, in parallel, exploring green hydrogen investment opportunities. 

IFC outlay in Chile, including mobilized third-party funds, is expected to hit US$1bn next year, roughly three times as much as delivered in 2021. 

To find out more about IFC's focus in Chile and its general economic outlook, BNamericas spoke with Alfonso García Mora, VP for Latin America and Europe at the private sector-focused multilateral development institution.

BNamericas: Could you give us a brief overview of your general economic outlook for the region?

García Mora: Latin America will face a couple of complicated years from an economic perspective. After the rebound from the COVID-19 crisis, the region will enter 2023 with probably the lowest growth among the world’s regions, with the exception of eastern Europe, because of the war in Ukraine.

Estimates from the World Bank, the IMF and others indicate the growth rate could be around 1.5%. Growth of 1.5% means this region will not be able to actually generate the equality or the inclusion that is needed. Growth below 2.0% is problematic from an inclusion perspective. 

We will also have to deal with limited fiscal space; countries, with COVID-19, have increased expenditure and therefore the fiscal position is not as buoyant as it could have been.

In addition to that, the region will require significant investment to deal with the structural climate crisis plus all the infrastructure needs that these economies have in order to advance productivity of the region.   

So, in that context, this is where we think the role of the private sector is more relevant than ever; that there is a huge need to crowd in private sector capital, to mobilize private sector capital and to be smart with the use of public finances. So, basically, use the public budget to protect the most vulnerable that will be affected significantly or negatively by the crisis that is coming and try to create the means for the private sector to come in.

BNamericas: What are the main pillars of your Latin America strategy?

García Mora: One is inclusion, the second is sustainability and the third is productivity.

BNamericas: What’s your outlook for Chile

García Mora: Chile is probably better prepared, has the fundamentals, to deal with what is coming, to take the necessary actions.

This is a country that is very open to the world and this will help it to really reposition with regard to the new supply chain, nearshoring changes we’re seeing across the world.   

Secondly, there’s long-term finance. This is a country that many years ago defined a clear pension fund scheme that helped develop capital markets and, therefore, provide a platform to finance infrastructure, which, at this moment in time, is critical.

Thirdly, the macro and fiscal situation of the country is better than that of many other countries in the region. 

BNamericas: Can you talk about any energy or transport projects in Chile?

García Mora: This region contributes 9% of global greenhouse gas emissions but is probably among those that will be most affected by climate change, so it is paramount to start thinking about adaption, how we adapt the economy, and in a way society, to what is coming.

Here, Chile can play a very important role, because there is a need to find new energy mixes, new energy sources etc. This is where the green hydrogen story in Chile comes in. At IFC, at the World Bank Group, we think that green hydrogen should be one of the big bets for this country. It can really change many things globally but also something that can help to support growth of the economy going forward.

Then there’s transport. We know that transport represents 25% of GHG emissions globally, which is a lot, and in this country, in Santiago, we have just invested in the largest electric bus program outside of China. I think this is just the start of something that will really need to continue developing. 

This is also a country where more than 52% of exports are related to mining, a huge percentage. Therefore, the country needs to think through how mining can become more sustainable, zero carbon in a way. And here is where we also think Chile can innovate big time. Using green ammonia, from green hydrogen, in mining will be a big change in terms of decarbonizing this industry.

This country has clear comparative advantages. It’s a question of aligning the stars and becoming a leader in this area.

We’re also working with [power generator] Engie. We’ve just signed a mandate to continue helping Engie Chile to decarbonize, to change the energy mix, decommissioning the coal plants and investing in solar and wind. 

IFC is in preliminary loan talks with Engie, so they can invest in these projects. This is coming next year. It’s early stage, we can’t talk about volumes yet.

BNamericas: So the buses and Engie are your two biggest projects at the moment?

García Mora: These are the two big things in terms of sustainability. There are other things that we are exploring, such as financing of green ammonia production, an input in the mining industry value chain.

BNamericas: Can you talk a little about the productivity pillar?

García Mora: Chile is not innovating as much as it could. If you look at R&D investment as a proportion of GDP, it’s quite a paradox: it’s actually much lower than you would have thought.

There’s one area that’s particularly relevant in our opinion and that is the digital economy. This country has huge potential to really invest in the digital economy and provide digital means, especially given the geographical configuration of the country. It’s a clear win-win in terms of productivity, and it’s linked to inclusion as well.

There is a huge agenda related to infrastructure, the digital economy, that requires private investment, and here’s where my story of the capital markets and long-term finance comes into play.

BNamericas: Do you have any investment targets for Chile?

García Mora: We don’t work with targets, but we expect to deliver around US$1bn in the country in this fiscal year [2023]. 

BNamericas: This is roughly three times as much as in 2021. How will this be delivered? 

García Mora: Most of this will be loans, not much equity, but there could be opportunities related to these three areas. 

It’s significantly more than what we have been doing in past years. And the reason is the opportunities that this country has. Plus, there is a need to support inclusive growth, sustainability.

One of the things IFC does is not only invest our own resources but also mobilize others. This is a critical thing. 

BNamericas: So that US$1bn includes third-party funds?

García Mora: Yes, it includes mobilization. We normally invest where we see that we can provide what we call additionality. We invest either because we provide terms or instruments that the market does not have, or in sectors or regions where the market is not. 

And having said that, the key thing about IFC is that our ESG framework – our environmental, social and governance framework – is very strong, and therefore all our borrowers need to comply with our framework. And once they comply, they comply with the ESG framework of any financial institution in the world. 

So we do all this due diligence for free for other investors. So when they see that IFC is investing in a company in Chile that nobody has invested in before, we talk to investors and say, “we’re investing here, are you interested?”

The types of investors we mobilize include local investors, usually banks, or institutional investors such as pension funds or investment banks; it can be international banks that are investing globally and also looking for these types of opportunities to invest in emerging markets, or it could be other development finance institutions.

The IFC quality stamp helps the borrower, as we say, to “graduate,” because if they have received financing from IFC this opens a new world for these companies, as they have already complied with the environmental, social and governance framework and therefore any investor in the world knows this company is already on track. 

This takes time, but it’s our role. We don’t only provide the financing but also this non-financial additionality that is quite important for the development of the private sector in these countries and for attracting international capital.    

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